Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

I need help solving i* for: (P/A,i*,5) = 3.125 please solve it by hand EXAMPLE 177 A fiber optics manufacturing company operating in Hong Kong

image text in transcribed

I need help solving i* for:

(P/A,i*,5) = 3.125

please solve it by hand

EXAMPLE 177 A fiber optics manufacturing company operating in Hong Kong has spent $50.000 for a 5-vear-life machine that has a projected $20.000 annual NOI and annual depreciation of $10,000 for years 1 through 5. The company has a Te of 40%. (a) Determine the after-tax rate of return. (b) Approximate the before-tax return and compare it with the actual before-tax ROR Solution a) The CFAT in year 0 is S-50.000. For years 1 through 5, there is no capital purchase or sale. TI NOI D 20,000 10,000 $10,000 CFAT = CFBT-taxes = 20.000-4000-$ 16,000 so NOI CFBT. (See Equations [ 17.1 ] and [ 17.9) Determine CFA Taxes = Te (TI) = 0.4( 10,000) = $4000 Since the CFAT for years 1 through 5 has the same value, use the P/A factor in Equa- tion [17.19]. 0 =-50,000 + 16,000(P/A,i*5) (P/A ,i+5) = 3.125 Solution gives i*-18.03% as the after-tax rate of return. (b) Use Equation [17.22] for the before-tax return estimate. 0.1803=0.3005 1- 0.40 (30.05%) Before-tax ROR = ) using CFBT = $20,000 for 5 years is 28.65% from the relation 0-50,00020,000(P/A,j*,5) The actual before-tax The tax effect will be slightly overestimated if a MARR of 30.05% is used in a before-tax

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Management

Authors: Geert Bekaert, Robert J. Hodrick

1st Edition

0131163604, 9780131163607

More Books

Students also viewed these Finance questions

Question

Did you print a proof to view color and image consistency?

Answered: 1 week ago